Sedco Forex Internat... v. Commissioner Of Inco...

P.C Verma, J.:— This income-tax appeal has been filed by the appellant-assessee under section 260A of the Income-tax Act, 1961, against the consolidated order of the Income-tax Appellate Tribunal, Delhi Bench “B”, New Delhi (for short, “the ITAT”) dated March 23, 1999, for the assessment years 1986-87 and 1987-88. The Income-tax Appellate Tribunal has dismissed the appeal of the appellant-assessee by holding that the Assessing Officer as well as the Commissioner of Income-tax (Appeals) were right in adding the amount of Rs. 99,04,000 for the assessment year 1986-87 and amount worth Rs. 64,64,530 for the assessment year 1987-88 received by the assessee towards mobilization charges for the purpose of imposing income-tax.

2. It appears from the perusal of the prayer made in the memo of appeal that only one appeal has been filed to set aside the composite judgment dated March 23, 1999, passed by the Income-tax Appellate Tribunal for the two assessment years, i.e, 1986-87 and 1987-88. No number of another appeal was given by learned counsel for the appellant at the time of hearing. The appellant is a non-resident company entered into agreement with the ONGC, India, for drilling contract between the ONGC and Sedco Forex, which is referred to in the contract as “operator” and the assessee referred to in the contract as “contractor”. The assessee was assessed by the Assessing Officer for the assessment year 1986-87 on amount of Rs. 99,04,000 and for the assessment year 1987-88 on Rs. 64,64,530 under section 44BB of the Income-tax Act, which included the mobilization charges in the relevant assessment years.

3. Against the order of the Assessing Officer, the assessee filed appeals for the relevant assessment years on the one and same ground that mobilisation charges were not actually charges but were expenses in nature which was reimbursed by the ONGC to the assessee towards the mobilization of the machineries from Portugal to Bombay seashore. Therefore, the amount of charges paid to the assessee as mobilization charges was not liable to be included. The Commissioner of Income-tax (Appeals) rejected the appeal of the assessee holding that the assessment has been made at 10 per cent. on the total amount received by the assessee, a non-resident company, under section 44BB and, therefore, the assessment order was valid.

4. Against the aforesaid order of the Commissioner of Income-tax (Appeals), the assessee filed two appeals numbered as I.T.A No. 4549.Del/91 for the assessment year 1986-87 and I.T.A No. 4550.Del/91 for the assessment year 1987-88 on the ground that a plain reading of the relevant clauses of the agreement executed between the appellant-non-resident company with the ONGC clearly reveals that mobilization fee paid by ONGC to the appellant-company were in the nature of reimbursement of the expenses incurred by the appellant-company for the mobilization of the drilling unit from their present location which was outside the taxable territories, viz., Setubal, Portugal to the location designated by ONGC, viz., offshore Bombay, India or to the other drilling units of ONGC (Kandla or Bombay).

5. The Income-tax Appellate Tribunal after examining the various clauses of the agreement in the light of the submission made by learned counsel for the assessee appearing before the Income-tax Appellate Tribunal recorded a categorical finding in paragraph 2.15 of the judgment which is reproduced as under:

“A perusal of the relevant agreements executed between the appellant-company and ONGC clearly reveals that both the agreements are indivisible contracts. It is true that mobilization fee and operating charges have been separately indicated in the said agreements but the entire payments have been agreed to be made by ONGC for supply of the drilling unit including the rigs, for operating those rigs, and for providing experts and other personnel for operating those rigs etc. Section 44BB specifically provides that the aggregate of the amounts referred to in sub-section (2) of section 44BB will be adopted as the basis for calculating profits at 10 per cent., which shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘Profits and gains of business or profession’. It does not provide that separate consideration mentioned in the agreement for transportation of the drilling unit/rig from their present location to the designated location in India will be excluded from the aggregate amount of gross receipts on which 10 per cent. profit rate is required to be applied. ONGC has made the entire payment including the mobilization fee, operating charges, daily hire on non-operating days, etc., for availing of the services and facilities and the supply of plant and machinery on hire agreed to be provided by the appellant-company to ONGC. The mobilization fee paid by ONGC to the appellant-company has no nexus with the actual amount incurred by the appellant-company for transportation of the drilling unit/rigs to the specified drilling location in India. Even if the actual expenditure incurred by the appellant-company would have been substantially less, ONGC was liable to pay the fixed amount of mobilization fee stipulated in the respective agreements.”

6. Accordingly, on the basis of the aforesaid finding the Tribunal rejected the appeal of the assessee vide order dated March 23, 1999, and confirmed the order of the Commissioner of Income-tax (Appeals).

7. The question of law raised to be considered by this court is as under:

“Whether, on the facts and circumstances of the case, the Tribunal was right in upholding the inclusion of mobilization charges while calculating the aggregate amount referred in sub-section (2) of section 44BB of the Income-tax Act.”

8. Section 44BB is a special provision for imposing the income-tax treating 10 per cent. of the aggregate amount specified in sub-section (2) of section 44BB as deemed profits and gains of such non-resident assessee who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. The amount referred in sub-section (2) of section 44BB are the amounts (a) paid to the assessee (whether in or out of India) on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India, (b) payable to the assessee (whether in or out of India) on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India, (c) received by the assessee in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India, and (d) deemed to be received by the assessee in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India, which is clear from the perusal of section 44BB, which is reproduced as under:

“44BB.(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘Profits and gains of business or profession’:

Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.

(2) The amounts referred to in sub-section (1) shall be the following, namely:—

(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and

(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.

(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.

Explanation.—For the purposes of this section,—

(i) ‘plant’ includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;

(ii) ‘mineral oil’ includes petroleum and natural gas.”

9. Thus, the amount which are to be taken are the amount paid to the assessee whether in or out of India, payable to the assessee whether in or out side India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India and the amount received or deemed to be received in India by the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.

10. Sri Porus Kaka, learned counsel for the assessee submitted that the amount of mobilization charges cannot be included in the amount referred to under sub-section (2) of section 44BB as the mobilization charges represent reimbursement of expenses incurred for transportation of drilling units of rigs from outside India to designated drilling places in India and the payment has also not been made in India. He very emphatically submitted that the payment outside India cannot be deemed to be received in India under clause (b) of sub-section (2) of section 44BB. He placed reliance on the following authorities:

(1) Saipem S.P.A v. Deputy CIT (Assessment), [2004] 88 ITD 213 (Delhi); [2005] 276 ITR (AT) 55 (Delhi);

(2) CIT v. Toshoku Ltd., [1980] 125 ITR 525 (SC);

(3) Carborundum Co. v. CIT, [1977] 108 ITR 335 (SC);

(4) Commissioner Of Income-Tax, Bombay City I v. Tata Chemicals Ltd., [1974] 94 ITR 85 (Bom);

(5) CIT v. Hukumchand Mills Ltd., [1968] 67 ITR 79 (SC);

(6) Anglo-French Textile Co. Ltd. v. CIT, [1954] 25 ITR 27 (SC);

(7) Hukam Chand Mills Ltd. v. CIT, [1976] 103 ITR 548 (SC);

(8) Commissioner Of Income-Tax v. Avtar Singh Wadhwan, [2001] 247 ITR 260 (Bom);

(9) CBDT v. Chowgule and Co. Ltd., [1991] 192 ITR 40 (Karn);

(10) V.M Salgaocar and Brother Ltd. v. Deputy Controller, [1991] 187 ITR 381 (Karn);

(11) CIT v. Best and Co. P. Ltd., [1966] 60 ITR 11 (SC);

(12) CIT v. Dunlop Rubber Co. Ltd., [1983] 142 ITR 493 (Cal);

(13) Commissioner Of Income-Tax v. Industrial Engineering Projects Pvt. Ltd., [1993] 202 ITR 1014 (Delhi);

(14) CIT v. Tata Engineering and Locomotive Co. Ltd., [2000] 245 ITR 823 (Bom);

(15) Godhra Electricity Co. Ltd. v. CIT, [1997] 225 ITR 746 (SC);

(16) CIT v. Tejaji Farasram Kharawalla Ltd., [1968] 67 ITR 95 (SC);

(17) Union of India v. A. Sanyasi Rao, [1996] 219 ITR 330 (SC);

(18) CIT v. Amarchand N. Shroff, [1963] 48 ITR (SC) 59;

(19) Commissioner Of Income Tax, Madras v. The Ajax Products Limited, [1965] 55 ITR 741 (SC);

(20) Sedco Forex International Drilling Inc. v. Joint CIT (Income-tax Appellate Tribunal “D” Bench, Delhi) (I.T.A No. 2024.D2001) (assessment year 1998-99).

(21) Circular No. 495 dated September 22, 1987, in respect of section 44BB ([1987] 168 ITR (St.) 87).

(22) The Finance Bill 1987 in respect of introduction of section 44BB ([1987] 165 ITR (St.) 29.)

(23) Notes on Clauses in the Finance Bill 1987 in respect of introduction of section 44BB ([1987] 165 ITR (St.) 119).

(24) Memorandum explaining provisions in respect of introduction of section 44BB in the Finance Bill 1987 ([1987] 165 ITR (St.) 152).

(25) McDermott International Inc. v. Addl. CIT, [2003] 259 ITR 138 (Uttaranchal).

(26) Commissioner Of Income-Tax v. F.Y Khambaty, [1986] 159 ITR 203 (Bom); and

(27) Ishikawajma-Harima Heavy Industries Ltd. v. Director Of Income Tax, Mumbai., [2007] 288 ITR 408 (SC).

11. Sri Porus Kaka, learned counsel for the appellant concluded by relying heavily on the law laid down by the hon'ble apex court in case of Ishikawajma-Harima Heavy Industries Ltd. v. Director Of Income Tax, Mumbai. reported in [2007] 288 ITR 408. The facts of this case have been narrated in the paragraph 2 of the judgment and are that the assessee appellant-company was incorporated in Japan, a resident of the said country, paid taxes in Japan. It is engaged, inter alia, in the business of construction of storage tanks as also engineering, etc. It formed consortium along with Ballast Nedam International BV, Itochu Corporation, Mitsui and Co. Ltd., Toyo Engineering Corporation and Toya Engineering (India) Ltd. With the said consortium members, it entered into an agreement with Petronet LNG Limited on January 19, 2001, for setting up a liquefied natural gas (LNG) receiving, storage and degasification facility at Dahej in the State of Gujarat. A supplementary agreement was entered into by the parties on March 19, 2001. The contract envisaged a turnkey project. Role and responsibility of each member of the consortium was specified separately. Each of the members of the consortium was also to receive separate payments. The appellant was to develop, design, engineer and procure equipment, materials and supplies, to erect and construct storage tanks of 5 MMTPA capacity, with potential expansion to 10 MMTPA capacity at the specified temperatures, i.e, -200 degree Celsius. The arrangement also was to include marine facilities (jetty and island breakwater) for transmission and supply of LNG to purchasers; to test and commission the facilities relating to receipt and unloading, storage and regasification of LNG and to send out regasified LNG by means of a turnkey fixed lump sum price time certain engineering procurement, construction and commission contract. The project was to be completed in 41 months. The contract indisputably involved : (i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services and (v) construction and erection. The price was payable for offshore supply and offshore services in US dollars, whereas that of onshore supply as also onshore services and construction and erection partly in US dollars and partly in Indian rupees.

12. While determining the tax liability of the appellant, the hon'ble apex court has taken into consideration section 5(2), section 9(1)(i) and section 9(1)(vii) of the Income-tax Act and considered the question of imposition of tax on income arising from a business connection of the appellant. Sri Porus Kaka heavily relied upon paragraph 98 of the aforesaid judgment which contains the conclusion as held by the hon'ble apex court. Subclause (6) of clause (A) of paragraph 98 reads as under (page 446 of 288 ITR):

“Clause (a) of Explanation 1 to section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, is taxable in India.”

13. And sub-clause (1) of clause (b) of paragraph 98 of the aforesaid judgment reads as below (page 447 of 288 ITR):

“Sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable.”

14. Sri Porus Kaka also referred from the judgment and submitted that where the non-resident assessee entered into a composite contract with a resident company under turnkey project the severable parts thereof comprised onshore and offshore services in India and also offshore and onshore services outside India and the price received by non-resident company for such services and supply was not taxable. We very respectfully submit that in the judgment Ishikawajma-Harima Heavy Industries Ltd. v. Director Of Income Tax, Mumbai. reported in [2007] 288 ITR 408; (2007) 3 SCC 481, the hon'ble Supreme Court has dealt with the assessment of a non-resident company on its income as per the provisions of section 5 and section 9 of the Income-tax Act. Here in the present case, provisions of section 5 and section 9 are not attracted. Section 4 is a charging section and section 5 contains the scope of total income, which provides that subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income as described under this section and section 9 provides the incomes deemed to accrue or arise in India in the contingencies described under this section. Therefore, section 5 and section 9 both are aimed at the income for the taxability under section 4 of the Act, while section 44BB does not take into account the income for calculating the aggregate amount to calculate 10 per cent. profits and gains. Profits and gains is a type of income to be taxed under a legal fiction, i.e, at 10 per cent. of the amount specified in sub-section (2) of section 44BB. Section 44BB is a special provision relating to the nonresident assessee who is providing services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in or outside India. The section is a complete code in itself. Thus, the reliance placed by Sri Porus Kaka, learned counsel for the assessee, is misplaced as we have observed that the amount referred in sub-section (2) of section 44BB are four types of amounts and all the four types of amounts are mutually inclusive and has to be taken into account either all of them or any of them and its clauses themselves provide that whether the payment is made inside India or outside India,

(emphasis1 supplied)

15. In the present case, a finding has been recorded by the Income-tax Appellate Tribunal that it was not in dispute before the Tribunal that the payment was made to the appellant-company outside India and the mobilization fee as claimed by the assessee was paid to the appellant by ONGC has no nexus with the actual amount incurred by the appellant-company for transportation of drilling units of rigs to the specified drilling locations in India. Hence, the mobilization fee is not the reimbursement of expenditure. ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by the assessee-company for the purpose. In view of the fictional taxing provision contained under section 44BB, the Assessing Officer was right in adding the amount of Rs. 99,04,000 for the assessment year 1986-87 and the amount worth Rs. 64,64,530 for the assessment year 1987-88 received by the assessee towards mobilization charges for the purpose of imposing income-tax and the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal were also right in upholding the order of the Assessing Officer.

16. In view of our foregoing discussion, the appeal is devoid of merit and is dismissed accordingly. Question is answered in favour of the Revenue and against the assessee. There shall be no order as to costs.